Category Archives: Investing Money

Here’s how bruised bears should approach this resilient stock market

bear-market-bearMy Comments: I’m facing increased criticism for preaching woe and gloom. In spite of a 24 month rain dance to herald the start of a storm, the sky is still clear, if a little overcast. Maybe it is different this time.

That being said, it’s time to stop with the woe and gloom and focus instead on steps to take advantage of the situation. As a friend pointed out yesterday, this stuff cycles and, yes, there will come a bad downturn, and you will be declared right. Meantime, you miss out on all the good stuff and end up stiffing your clients.

So… how do we set ourselves up to be successful? Here’s a start.

by Anora Mahmudova | Published: Sept 27, 2016

It is perfectly fine to be pessimistic about future stock market returns, as long as you’re prepared to think outside the box when it comes to seeking out safe investments, analysts said.

There is no shortage of scary charts and lousy fundamentals that point to equities being risky. But they rarely, if ever, can be used to pinpoint a market top. Indeed, bold bearish calls continue to get rebuffed in this long-running bull market.

Recall that in early January, RBS analysts made their highly publicized call to “sell everything except high quality bonds”.

Barely a month later, when the S&P 500 SPX, +0.64%  dropped to multiyear lows to mark a third correction in less than two years, it seemed the call would be vindicated. But after nine months, it is apparent that heeding it would have been costly as markets soon rebounded and then rallied to records.

Valuations are above historical averages and earnings growth has deteriorated over the past two years—all suggesting that, in the long term, returns are going to be low.

Wouter Sturkenboom, senior investment strategist at Russell Investments, said the current environment has been among the most trying he can recall for market bears.

“Normally, if you feel bearish about the stock market you would be looking for safe bets but right now, all the traditional safe bets are no longer safe,” Sturkenboom said, in an interview.

Even bonds, which tend to rally when things get gloomy, aren’t a reliable wager.

“Bonds are overvalued, which makes exposure to duration risky if inflation rises even by a bit,” he said.

Duration is a measure of the sensitivity of a bond’s price to a change in interest rates. Bonds with higher duration carry more risk.

The first step investors should take now is to accept that future returns will be low, said Michael Batnick, director of research at Ritholtz Wealth Management.

“Stocks are expensive on every metric you take and that means that future returns will be lower. Investors should simply accept it and act accordingly, which means saving more,” he said in an interview..

“The idea you can take lower returns and turn them to get higher returns by timing is ruinous for average investors. It doesn’t work for the vast majority of investors. Even if you knew with precision how much earnings will be next year, you won’t know what multiple millions of investors are going to pay,” he said.

While pessimism about returns is pervasive, there are still ways to invest and build wealth.

Both Batnick and Sturkenboom advocate adding assets with lower valuations while trimming exposure to expensive U.S. large-cap equities.

“For investors looking for safety bets, they should think outside of the box. Safety now comes in cheap valuations and there are several assets that could fit the bill out there,” Sturkenboom said.

Among assets that Sturkenboom prefers are Spanish and German real-estate investment trusts, gold ETFs, Treasury inflation-protected securities, or TIPS, and cash.

While cash gives investors the option to swoop in and sweep up bargains when the market tanks, it requires patience as big drawdowns are rare events, Sturkenboom said.

“Cash is good if you are tracking markets and can deploy it quickly. The past three years have been disappointing for those who held cash and were unable to buy at corrections, because they were very short-lived,” he said.

“But in the current environment it is still worth it to keep cash for the eventual 30%-40% drawdown, the likelihood of which is pretty high over the next three years,” he said.

Batnick is a fan of rules-based planning: “You have to have a plan and stick to it. Allocate to markets that are cheap on relative and absolute terms, but don’t try to wing it,” he said.

“Building wealth through investing in the stock market requires a lot of pain. There will be big drawdowns. But more money has been lost by trying to avoid drawdowns than by staying invested,” Batnick said.

5 Smart 401(k) Moves to Make Now

financial freedomMy Comments: You say you don’t have a 401(k)? Maybe you have a 403(b), or an IRA with exposure to the market. If you are in or close to retirement and your investment portfolio goes to hell, you simply don’t have enough time to hope it recovers and gets back on track. Be defensive for a while and sleep better at night.

by Carolyn Bigda | September 26, 2016

Storm clouds are forming, so take your nest egg off autopilot and steer to clearer skies.

Blissfully, making your 401(k) grow hasn’t been that hard in recent years. Since March 2009, the S&P 500 index of U.S. stocks has more than tripled in value. And thanks to the Pension Protection Act—now celebrating its 10th anniversary—many workers are automatically enrolled in 401(k)s. “Inertia has led to some pretty powerful results,” says Katie Taylor, director of thought leadership at Fidelity.

But inertia works only as long as the winds are blowing in the right direction. Today there are signs that momentum could be shifting. U.S. equities, for one, are as frothy now as they were leading up to the 2007–09 bear market and the Great Depression in 1929. The S&P 500 trades at a price/earnings ratio of 27.3 based on 10 years of averaged profits, a 63% premium to historical averages.

Meanwhile, corporate profits have been declining for five consecutive quarters, the worst such streak since the financial panic. And worried fund managers have amassed large piles of cash, according to a recent Bank of America Merrill Lynch survey.

None of this means your 401(k) needs a major overhaul. This is, after all, your long-term portfolio, meant to endure choppy air from time to time. But a few tweaks now can help ensure that inertia doesn’t work against you—and that you’re still on track no matter what happens in the market.

Get over your fear of bonds

If you haven’t rebalanced your 401(k) in a while, it probably looks different from what you remember. Without rebalancing, a moderate 60% U.S. stock/40% U.S. bond portfolio at the end of the last recession is now closer to an aggressive 80% equities/20% bond mix, according to Morningstar.

The rule of thumb: If your weightings are off-kilter by five percentage points or more from your desired mix, it’s time to take action.

Some investors, though, may be wary of rebalancing into bonds now, notes Maria Bruno, a senior investment analyst in Vanguard’s investment strategy group. That’s in part because fixed-income prices fall when interest rates rise, and the Federal Reserve could lift rates before the year is out.

But “rebalancing helps protect you from short-term volatility,” Bruno notes. Even if fixed-income prices fall, bonds can still serve as a cushion. The worst calendar-year loss for intermediate-term government bonds was 5.1%, in 1994. By contrast, the worst loss for blue-chip U.S. stocks was 43.3%, in 1931.

You can further reduce risk by choosing bond funds with an average “duration” of about five years or less, which are less sensitive to interest-rate moves, says Peter Mallouk, president of Creative Planning in Leawood, Kans. (A duration of five implies that if rates rise one percentage point, the fund could lose 5% in value.) You can look up this figure for your plan’s fixed-income offerings at If your 401(k) doesn’t offer a good low-duration option, go with a core fund such as Dodge & Cox Income DODIX 0% , with a duration of just four years, in your IRA. The fund, which has beaten more than 80% of its peers over the past five, 10, and 15 years, is in our MONEY 50 recommended list.

Get ready for the mother of all stock market corrections once central banks cease their money printing

dow-2007-2016My Comments: The evidence is almost compelling. Compare this chart with the one I posted yesterday. If you are not on the sidelines, or positioned to go short at a moments notice, prepare for some pain.

by Jeremy Warner | September 20, 2016 | The Telegraph

Global stock and bond markets have been all over the place of late. Rarely have investors been so lacking in conviction. Confusion as to future direction reigns, and with good reason after the spectacular returns of recent years.

For how much longer can stock markets keep delivering? Is there another recession on the way, or to the contrary, is growth likely to surprise positively, underpinning current valuations? Economic turning points are never easy to spot, but right now it’s proving harder than ever.

The immediate cause of all this uncertainty is, however, fairly obvious. It’s the US Federal Reserve again, and quite how far it is prepared to go with the present tightening cycle. Few expect policy makers to act at this week’s meeting of the Federal Open Market Committee.

Even so, a number of its members have once again been making hawkish noises, and another rise in rates by the end of the year is widely anticipated.

Indeed, it is on the face of it quite hard to see how the Fed can avoid such action. Already at 2.3pc, core inflation in the US is trending higher. The US labour market continues to tighten, and money growth, for some a key lead indicator, is strong.

On the stitch in time principle, the Fed ought to be acting now to head off the possibility of over heating further down the line. Policymakers are also desperate to return to some semblance of “normality” after the long, post financial crisis aberration in rates, if only to give themselves room for monetary stimulus when the next downturn does eventually materialise. If there were a recession now, there’s not a lot in the armoury to throw at it.

None the less, the “R” word is once again on many people’s lips. No policymaker would want to raise rates into an impending downturn, even if, historically, they quite frequently seem to make precisely this mistake. Is the Fed about to conform to type, and tip the economy back into recession?

According to Chris Watling, chief market strategist at Longview Economics, a wide range of indicators confirm the message: recession risks are rising. And if a recession is indeed looming, it almost certainly means a bear market in equities. Looking at all the US recessions of the last 77 years, Mr Watling finds that there is only one (1945) which has not been accompanied by a stock market correction.

Complicating matters further is an ever more worrisome phenomenon – that both bond and equity markets are being artificially propped up by central bank money printing. Further easing this week from the Bank of Japan would only deepen the problem. Yet eventually it must end, and when it does, share prices globally will return to earth with a bump. Only lack of alternatives for today’s ever rising wall of money seems to hold them aloft.

Over the last year, central bank manipulation of markets has reached ludicrous levels, far beyond the “quantitative easing” used to mitigate the early stages of the crisis. Through long use, “unconventional monetary policy” of the original sort has become ineffective, and, well, simply conventional in nature.

To get pushback, central banks have been straying ever further onto the wild-west frontiers of monetary policy. Today it’s not just government bonds which are being bought up by the lorry load, but corporate debt, and in the case of the Bank of Japan and the Swiss National Bank (SNB), even high risk equities.

Never mind the national debt, much of which is already on the Bank of Japan’s (BoJ) balance sheet, the Japanese central bank is steadily nationalising the Japanese stock market too. According to estimates compiled by Bloomberg from the central bank’s exchange traded fund holdings, the BoJ is on course to become the top shareholder in 55 of Japan’s biggest companies by the end of next year.

From the sublime to the ridiculous, the SNB now owns $1.5bn of shares in Facebook and is one of the biggest shareholders in Apple. Meanwhile, both the Bank of England and the European Central Bank have announced massive corporate bond buying programmes, including, in the BoE’s case the sterling bonds of the aforementioned Apple. Quite how that’s meant to benefit the UK economy is anyone’s guess.

For global corporations at least, credit has never been so free and easy, encouraging aggressive share buy-back programmes. This in turn further inflates valuations already in danger of losing all touch with underlying fundamentals. By the by, it also helps trigger lucrative executive bonus awards.

Where’s the real earnings and productivity growth to justify the present state of stock markets? As long as the central bank is there to do the dirty work, it scarcely seems to matter.

In any case, the situation seems ever more precarious and unsustainable. Conventional pricing signals have all but disappeared, swept away by a tsunami of newly created money. Globally, the misallocation of capital must already be on a par with what happened in the run-up to the financial crisis, and possibly worse given the continued build-up of debt since then.

So what could come along to upset this already highly unstable apple cart? Too hasty a monetary tightening by the Fed would certain do it. The Fed doesn’t want to risk a repeat of the so-called “taper tantrum” of 2013, when it was forced into retreat from monetary tightening by an adverse market reaction.

Something similar may already be underway today. Financial conditions have tightened considerably since the summer; the dollar has strengthened, stocks have sold off, at least in the US, and bond yields have risen.

The pattern is a familiar one, in which markets tighten by just enough to deter central bankers from actually going through with the deed and lifting rates. It proved hard enough for the Fed to cease QE. Raising rates by a quarter of a point from zero proved equally long winded and traumatic.

Raising them further may be just as taxing. Every time the Fed hints at doing so, markets counter by threatening to tip the economy back into recession. It’s a brutal tread mill that policy makers have made for themselves; getting off without breaking a leg is proving hard to impossible.

Both main US presidential candidates promise fiscal stimulus should they win. China is also set on a path of fiscal easing, at least for now, while even in Britain there is some possibility of fiscal expansion in response to the Brexit vote. This may ease the path of future interest rate increases somewhat. Unwise to count on it, though.

6 Reasons The US Stock Market Is Doomed

My Comments: My type A personality is having a hard time not knowing just when the next market correction is going to happen. The six reasons expressed in this article are, in my opinion, very credible.

Some clients have recently abandoned me because I’ve been preaching patience. We’re rapidly approaching the point where the only people buying and moving into the market are the amateurs. They are almost always the last to get in when it’s going up and the last to get out when it’s going down. It has always been thus.

by Tony Sagami | Mauldin Economics | September 18, 2016

The Dow Jones Industrial Average has been going sideways ever since the Commerce Department reported that retail sales in July came to a grinding halt (0.0%).

At the same time, companies including Starbucks, McDonald’s, Ford, Burberry, and Gap are reporting disappointing sales. That means trouble in shopping paradise.

Target just reported a Q2 drop of 1.1% in same-store sales. It expects a “challenging environment in the back half of the year.”

There are many reasons why Americans have become reluctant shoppers. I talked about this in my recent article “The Stressed-Out, Tapped-Out American Consumer.” Stagnant incomes and rising debt loads are part of the problem.

But another big factor is a change in spending psychology.

Extremely Rare Volatility Signal Says A Big S&P 500 Move May Be Coming

bear-market--My Comments: More potential woe and gloom for those with money in the markets. Will it happen today? It may have started last Friday, but who knows.

There are a lot of charts shown which I’ve elected not to include here. Instead I’m giving you a link at the bottom so you can follow it yourself and see what the author is talking about.

There are competing metrics for guessing the markets; fundamental and technical. Neither is right all the time; it is instead a different philosophy of choosing how best to respond to changes on any given day. This one is from the technical camp.

I’m encouraging all clients to put their investments either in cash or on a platform that allows an inverse position that typically makes money in a downturn. It’s your call.

Big Moves Often Follow

Regular viewers of CCM’s weekly videos may be familiar with the expression “the longer a market goes sideways, the bigger the move you tend to get after a breakout or breakdown”, which aligns with the concept of periods of low volatility often being followed by big moves in asset prices.

Lowest Level Dating Back To 1982

Bollinger band width is one way to track relative volatility. When Bollinger band width readings hit extremely low levels, it tells us to be open to a big move. The S&P 500’s daily Bollinger Band width has never been lower than it is today, using data back to 1982, which means a big move could be coming soon in stocks.


The Stock Market Is About To Have A ‘Final Melt Up’

roller coaster2My Comments: Anyone who suggests they know what is likely to happen to the markets in the coming days is probably just hoping they will be right. And that includes me.

A high percentage of significant market downturns have happened in August and September. This article suggests there is an event planned for the end of August that might be the trigger that starts the next one. Obviously we are now in September but the danger level is still high.

My suggestion is to either be in cash, or in a program designed to make money when the markets tump.

Bob Bryan – August 16, 2016

The market has one last run left.

Stocks could get a huge boost as investors worry about missing gains, according to Michael Hartnett, the chief investment strategist at Bank of America Merrill Lynch.

According to a note from Hartnett titled “The Final Melt Up,” the shift of investors from defensive stocks (such as industrials and telecoms) to more cyclical companies (retail, tech, and consumer goods) shows that investors’ appetite for risk is growing.

This will create demand for stocks and drive the market upward.

“Likelihood of melt up in risk assets into Jackson Hole growing … likely followed by jump in yields,” he wrote.

The chart below illustrates the rotation that Hartnett is noticing:

Essentially, a melt up by definition is a sudden leap in the market caused by investors rushing in because they fear missing out. It’s not a sign of improved fundamentals.

In other words, these companies and markets may not have higher earnings or be stronger investment opportunities.

Hartnett doesn’t go into the details of the end of the melt up, but the speech by Federal Reserve Chair Janet Yellen at the Jackson Hole conference at the end of the month appears to be the catalyst that will stop the stampede.

‘Biggest Bond Bubble in History’ is About to Burst

bear-market--My Comments: Broken record time again. The punditry has almost one voice and yet the markets are not listening. I can’t wait until November 9 arrives.

Aug 20, 2016 – The Irish Times

“The market can remain irrational longer than you can remain solvent,” is a famous quote, often attributed to JM Keynes. And indeed we have experience in Ireland of how a market – in our case the housing market – can remain irrational for a long period of time. The “ fundamentals” were supporting it, was the argument. And how wrong it was.

Now we have the same argument being used to support the super-low and even negative yields in bond markets, especially those for Government debt. Some $13,000 billion of bonds worldwide are now trading at negative interest rates, including short-term Irish Government debt. But with central banks pumping billions into the world economy (often by buying bonds), growth remaining at record lows and official interest rates on the floor, we are told, yet again, that the fundamentals are supporting all this.

Looks like a duck

Perhaps they are. But the lesson of our housing market reflects the theory about something that looks like a duck and quacks like a duck. And so enter Paul Singer of Elliot Management, who should know something given that his hedge fund manages $28 billion in assets.

He told investors in a letter this week that, in his view, the turnaround in the bond market was likely to be “surprising, sudden, intense, and large”. He said he believed we were in “the biggest bond bubble in world history”, and advised investors to avoid sub-zero yielding debt.

“Hold such instruments at your own risk; danger of serious injury or death to your capital!” he wrote, according to CNBC.

Of course such warnings have been made for the last couple of years and, despite them, bond prices have continued higher and yields – or interest rates – have continued to decline. It is hard to know what might burst the bubble, with little sign of a big take-off in growth or inflation. But common sense would suggest that investors paying governments to lend them money to cover their budget deficits really doesn’t make a lot of sense.

As Singer said, it could all end with a bang. But when, and why, is the really hard question to answer.